Congress Takes Look At Mortgage Lenders

The banking committees on both sides of Capitol Hill stepped up efforts recently to protect homeowners and home buyers from improper practices by lenders. But they were confronted quickly by industry representatives saying, in effect, let's not be hasty. Representatives of mortgage bankers, banks and other lenders urged the two panels to proceed slowly lest they increase the cost of mortgages or, in some cases, choke off credit.

The issues involved are home mortgage escrow accounts, which were before the House Banking Committee's housing subcommittee, and reverse redlining, the practice of extending credit on impossible terms to cash-poor homeowners, which was before the Senate Banking Committee.

While consumers have complained about the issues for many years, the chairmen of both panels are pushing legislation to eliminate what they view as major abuses.

Escrow accounts have become a particular target in recent years as mortgage loans and their ''servicing,'' the business of collecting payments from the homeowner each month, have been increasingly treated like commodities, to be bought and sold whenever it suits the owners.

Escrow accounts are meant to hold funds to pay taxes and insurance on the property. The lender calculates what these amounts will be and requires the borrower to pay a part of the total each month along with the mortgage principal and interest.

Lenders say such accounts are both convenient for the homeowner, who does not have to worry about those bills or about coming up with a big payment several times a year, and a protection for the lender, who does not have to worry that its collateral may go uncovered by insurance or be lost to a tax lien.

Homeowners, though, have complained of being required to make extra payments, of having difficulty obtaining prompt transfers of escrow funds from one servicer to another, and of failure by the escrow holder to make prompt payments of the taxes and insurance.

Some consumers also object to making what amounts to a free loan to the mortgage servicer, who gets to hold the money for several months before the tax and insurance bills are due.

A bill introduced by the House panel chairman, Rep. Henry B. Gonzalez, D-Texas, includes these proposals:

Servicers would be required to pay interest on funds held in escrow. Some states already require this; Florida does not.

Borrowers would be allowed to opt out of the escrow system once the mortgage balance reached 80 percent of the value of the house.

The amount of money in the account would be required to fall to no more than two months of payments at some time during the year; this would prevent the buildup of very large balances.

Borrowers' rights would be clarified, and the Department of Housing and UrbanDevelopment would be ordered to study the feasibility of standardizing escrow procedures.

Consumer groups generally applauded the proposal, but lenders said it would raise the cost of mortgage money.

Steven Ashley of the Mortgage Bankers Association of America told the panel that, while the industry ''is not satisfied with the status quo,'' the measure as proposed ''will increase interest rates and/or fees'' at the time the loan is made. These costs would mean home buyers would have to come up with more cash at settlement - perhaps a quarter of a point, or $250 more on a $100,000 loan, he said.

Lenders would be exposed to greater risks because taxes or insurance premiums might not be paid, Ashley added. ''Many borrowers are not disciplined enough to save to pay taxes and insurance'' when these are due, he said. Many might, therefore, be forced to borrow to make these payments, thus increasing their debt burden even further, he said.

Chris Lewis of the Consumer Federation of America called the escrow accounts ''hidden'' costs that provide ''a valuable cushion'' for the mortgage lending industry.

In the Senate committee, representatives of the banking and consumer loan industries, as well as a member of the Federal Reserve Board, expressed doubts about a measure that would impose new disclosure requirements and potential penalties on lenders who make very high-interest or high-fee loans to homeowners.

The committee has heard reports of homeowners who took out what they thought were modest-sized loans only to discover they had signed papers for huge loans with enormous fees and high interest rates. Many of these are low-income or elderly people who were persuaded to take the loan by a door-to-door ''salesman.''

Lending industry representatives endorsed the goals of the measure, sponsored by Senate Banking Committee Chairman Donald Riegle Jr., D-Mich., and Sen. Alfonse D'Amato, R-N.Y., but cautioned that it is so broadly worded that it might snuff out much legitimate lending.